Khan Mahmood 2023 Emerging Global Trading Environment Challenges For Pakistan

Emerging Global Trading Environment:
Challenges for Pakistan

Ashfaque H. Khan and Zafar Mahmood
by 223.123.85.116 on 04/13/24. Re-use and distribution is strictly not permitted, except for Open Access articles.
Abstract. This paper attempts to identify the opportunities opened up by the Uruguay
Asian Development Review 1996.14:73-115. Downloaded from www.worldscientific.com
Agreement, costs imposed by it, and the manner in which growing regionalism and
interface of trade with labor and environmental standards are expected to inf/,uence
Pakistan's trade prospects. This paper also suggests response strategies so that Pakistan
can maximize gains or minimize the damage from the changes contemplated in the
Agreement. Pakistan's exports are likely to receive significant tariff and nontariff reduction
in their destination. However, market access will only materialize if domestic producers
observe standardization and quality control. The GATS provides an opportunity to increase
economic efficiency of its services sector. Liberalization of investment regime under TRIMS
Agreement is expected to attract foreign direct investment. To satisfy the requirements of the
TRIPS Accord, Pakistan will have to make significant changes in its legislation on
intellectual property rights. In the midst of growing regionalism, Pakistan's policy response
should be to strengthen regional blocs in its neighborhood (SAARC and ECO). Finally, to
satisfy controversial labor and environmental requirements, Pakistan needs a strict
compliance to ILO Conventions and international environmental standards.
Introduction
T
he Uruguay Round (UR) multilateral trade agreement, which took effect
on 1 January 1995 after more than seven years of extensive negotiations,
is the most ambitious and detailed trade agreement ever negotiated in the
history of international trade. The Agreement seeks to strengthen the necessary
institutional framework to attain greater efficiency, improve use of scarce re-
sources, and increase global trade by ensuring freer trade in goods and services.
The Agreement has sought to bring not only new sectors and areas such as agri-
culture, textile and clothing, trade in services, trade-related aspects of intellectual
property rights (TRIPs), and trade-related investment measures (TRIMs) under
the GATT umbrella, but has also sought to cut in stages the average tariff rates
across the board on tradeable commodities both in the developed and developing
countries. The centerpiece of the Agreement is a new multilateral organization,
The authors are Joint Director and Chief of Research, respectively, at the Pakistan Institute of Development
Economics, Islamabad, Pakistan. This paper is an abridged and updated version of the study entitled Emerging
Global Trading Environment and Developing Asia: A Case Study of Pakistan. The authors are thankful to two
anonymous referees of this journal for their useful comments· on an earlier draft. They also wish to thank
Mahboob Iqbal for typing several drafts of this paper. Any remaining errors and omissions are the sole res-
ponsibility of the authors.
Asian Development Review, vol. 14, no. 2, pp. 73-115 © 1996 Asian Development Bank
74 Asian Development Review
the World Trade Organization (WTO), which is designed to bring under one roof
all the separate agreements negotiated during the Round. The WTO is expected
to improve dealing in trade issues and give new assurance to developing countries
that the commitments they have obtained from the developed countries are se-
cure and enforceable. The Agreement has opened up new opportunities and, if
grasped adroitly, can benefit both developed and developing countries.

Notwithstanding its unequivocal positive outcome, there are difficulties
facing the actual translation of the commitments made in the UR Agreement
into concrete trading opportunities. Some of the agreements leave a margin of

interpretation that could allow the reintroduction of protectionist measures.
If developing countries are not aware of these pitfalls they may fail to seize
the opportunities available to them and reap the expected benefits from the
Agreement.
It is against this background that the present paper examines the impli-
cations of the UR Agreement on Pakistan. In particular, the paper attempts
to identify the opportunities opened up by the Agreement, costs imposed by
it, the manner in which growing regionalism is expected to influence trade
prospects, adverse effects of linking trade with labor and environmental
standards, and strategies to minimize adjustment costs and maximize the
gains from expected changes in the trading environment. Furthermore, this
paper also suggests response strategies so that Pakistan can maximize gains
or minimize the damage from the changes contemplated in the UR Agree-
ment.
The paper is structured as follows. An overview of the structure of
Pakistan's exports and imports including trade and foreign investment poli-
cies is presented in the second section. The UR Agreement and its implica-
tions on Pakistan's economy are covered in the third section. The issue of
regionalism and its impact on Pakistan is discussed in the fourth section.
New issues such as the interface between labor and environmental standards
and international trade are discussed in the fifth section, while concluding
observations are contained in the final section.
Trade and Foreign Investment Policies

and Trade Performance
Trade and Foreign Investment Policies
Since 1988, Pakistan has followed a, more market-oriented reform stra-

tegy, with a strong focus on export orientation. Despite the reform steps, the
degree of insulation of Pakistan's economy has remained substantial, and
Pakistan 75
many of the institutions based on the old trade policy are still in place. The
tariff system lacks transparency due to numerous exemptions and conces-
sions extended under Special Regulatory Orders (SROs), with broad discre-
tionary power enjoyed by the administration (see Khan and Mahmood 1996).
With a view to enhancing the efficiency of domestic industries, improv-
ing resource allocation, removing antiexport bias in the earlier tariff regime,
and integrating the economy with the new global trading system, Pakistan is
implementing a program of tariff reform with a sequential tariff reduction.
The maximum tariff rate (MTR) has been reduced from 225 percent in 1986
to 45 percent in 1996 (see Table 1).
Table 1: Tariff Reduction Schedule
Maximum Tariff Rate

Year (in percent)
1986/87 225
1988/89 125
1990/91 95
1993/94 80
(92)
1994/95 70
1995/96 65
1996/97 45
Note: Number: in parenthesis include paratariffs
Source: Pakistan Economic Survey (various issues).
However, the paratariffs such as import fee, "iqra" surcharge, and flood
relief fund have been merged into statutory rates of custom duties. Thus, the
MTR in 1993 after the merger of paratariff stood at 92 percent, which was
then reduced to 70 percent in 1994, and further to 65 percent in 1995. In
1993, the tariff structure consisted of 13 different rates: 0, 10, 15, 20, 30, 40,
50, 60, 70, 75, 80, 90, and 100. The simple average ad valorem statutory tariff
rate was 56 percent, with a standard deviation of 27 percent. The most com-
mon tariff rates wete 75 and 80 percent, together accounting for more than 44
percent of all tariff lines (see GATT 1994, Khan 1996). Rates of 30 percent
and 50 percent were applied to 21 percent and 11 percent of all tariff lines,
respectively. In agriculture, the simple average tariff was 55 percent, with
half of the tariff lines subject to the 80 percent maximum for
agricultural imports. In 1994, the average tariff rates on agricultural goods

was reduced to 49 percent.
In manufacturing, the simple average tariff was 60 percent, with over 40
percent of the tariff lines having rates under 75-80 percent. For the remain-
der, rates varied from 30 percent (22 percent of tariff lines) to 60 percent (6
percent of tariff lines). Rates for industrial raw materials and intermediate
goods ranged from 20 to 50 percent, while imports of capital goods attracted
rates from 40 to 80 percent. In 1994, the average tariff on manufactured
goods was reduced to 51.4 percent. Minimum rates for industrial raw materi-
als and intermediate goods have also been reduced to 10 percent and 15 per-
cent respectively (see Ingco and Winters 1995).
A new tariff reform was announced on 28 March 1997 with a view to re-
vitalize the economy in general and the industrial sector in particular. The
MTR was further reduced to 45 percent and the 10 percent regulatory duty
on imports was abolished. The number of slabs in custom duties was reduced
from 13 to 5, with rates of 10, 15, 25, 35, and 45 percent. The tariff rate on
plant and machinery was standardized and brought down to 10 percent. The
tariff structure has also been properly cascaded, with duties ranging from 10
to 45 percent on primary raw materials, intermediate goods, and finished
products. Tariff rates on a wide range of smuggling-prone items were brought
down to between 10 and 25 percent. To broaden the base of revenue, an
across-the-board minimum tariff of 10 percent was imposed with the excep-
tion of essential items like wheat, fertilizer, and life saving drugs. Pakistan's
tariff system has been criticized for its lack of transparency due to numerous
exemptions and concessions extended under SROs, with broad discretionary
power enjoyed by the administration. Under the new tariff
reforms, all such SROs have been withdrawn effective 1 July 1997, except
those relating to international commitments and exports or those which are
time-bound.
As regards nontariff policies, Pakistan, until recently, extensively used
import prohibitions, import licensing, and other nontariff measurers to con-
trol import flows. In the last several years, however, Pakistan has made sub-
stantial progress in eliminating or reducing nontariff barriers to trade. The
1
number of tariff lines included in the Negative List has been reduced from
300 to 75. The scope of import licensing was reduced and completely elimi-
nated in 1993. The Import Policy Order 1994 has also abolished the
1. The Negative List is composed of items whose imports are banned due to religious, cultural,
and balance of payments reasons.
Pakistan 77
Restricted List2, products which were importable only through designated

importers. Until mid-1994, certain products (agricultural tractors and some
motor vehicles in CBU condition) were subject to standardization require-
ments, which meant that only some specified makes were importable; this
restriction has also been abolished, as have import quotas on machinery and
millwork. However, Pakistan still applies a substantial number of nontariff

measures. The Negative List also contains goods such as textile and clothing
items, whose imports are restricted for balance of payments reasons. Some 75
items of all commodity categories still remain on the Negative List. Other
nontariff measures include the items which appear in the Restricted List.
Pakistan also retains export restrictions in respect of a wide range of
products. There are 25 product groups, mainly agricultural, whose exports
are subject to ad valorem, specific, or compound duties, either for revenue
reasons or to serve as a disincentive to export raw materials. The statutory ad
valorem duty rates range between 10 and 45 percent but concessionary rates
can be applied. A number of products are subject to an ad valorem or specific
export. In 1993, Pakistan introduced a 0.25 percent export development cess
on all exports, used for the establishment of training institutions for export-
oriented industries, strengthening research and development, and promoting
exports.
Export prohibitions apply to 29 percent of export categories. Most items
are on the list for health or social reasons, but some are included to ensure
the adequacy of internal supply at reasonable prices. There are six broad
product categories whose exports are subject to export licensing, mainly on
environmental, cultural, health, or safety considerations. There are also a
number of products whose exports are subject to special procedures based on
economic considerations. Exports of fertilizers are allowed only after deter-
mining the existence of an exportable surplus. Exports of rice by the private
sector are subject to registration of contracts with the Export Promotion
Bureau (EPB) and preshipment inspection by internationally recognized
inspectors; exports of cotton by the private sector are subject to procedure as
may be specified by the government in the Gazette. Exports of food items,
products of animal origin, fruits and vegetables, products of oilseeds, certain
electrical goods, and others, are subject to quality control restriction. Exports
of textiles .and clothing to countries with which Pakistan has concluded
bilateral restraint agreements under, the MFA are governed by the Textile
Quota Management Policy.
2. The Restricted List is a list of items whose imports are controlled for health and safety and
procedural requirements. Importers have to seek permission from the relevant government agencies
to import items which appear in this list.
To complement the liberalization of the trade regime, the exchange

system has been fully liberalized. As of 1 July 1994, Pakistan has adopted
current account convertibility of the rupee and eliminated all multiple cur-
rency practices. Accordingly, the country has accepted and fulfilled the obli-
gations of Article VIII of the IMF's Articles of Agreement. Pakistan's foreign
exchange regulations are also liberalized for most aspects of its capital
account. There are no restrictions on repatriation of profits and capital asso-
ciated with foreign direct investment. Residents and nonresidents are
allowed to maintain foreign currency accounts and are free to transfer their
balances abroad.
Pakistan has pursued a managed floating exchange rate policy since
January 1982. In this policy, the State Bank of Pakistan (SBP) continuously
adjusts the Pakistani rupee against a basket of currencies, with the US dollar
serving as intervention currency. Pakistan does not follow a specific policy
with respect to either real or nominal effective exchange rate of the
rupee. Occasionally, the SBP devalues its currency to maintain external com-
petitiveness. Three such exchange rate adjustments (devaluation) have taken
place since July 1995, that is, in October 1995 by 7.0 percent; in September
1996 by 3.65 percent; and in October 1996 by 7.85 percent. Apart from these
three devaluations, the SBP continued to pursue the creeping devaluation
policy, i.e., adjusting currency on an almost daily basis. Thus during the last
21 months (July 1995-March 1997) the cumulative downward adjustment of
the Pakistani rupee amounted to almost 30.0 percent. Even with this magni-
tude of downward adjustment, Pakistan's trade balance did not improve. In
fact, the trade balance deteriorated during 1995 and
further in 1996. There appears to be two main reasons for the deterioration
despite the 30 percent adjustment of the currency. Firstly, the devaluation
was not accompanied by tight monetary policy. Secondly, there were supply
bottlenecks as Pakistan's industrial sector was stagnating during the last
three years, growing at an average rate ofless than 1.0 percent per annum.
Foreign Investment Policies
Pakistan has implemented a more liberal foreign investment policy as

part of its economic reform program. Virtually all of Pakistan's industrial sec-
tors are now open to foreign investment, with foreign equity holdings allowed
up to 100 percent. The issuance of shares, remission of dividends, and repa-
3
triation of capital by foreign investors is permitted. Prior to the initiation of
reform in 1988, foreign investment was generally subject to prior
3. For further details on foreign investment policies, see Khan and Mahmood (1996) and Khan
(1997).
Pakistan 79
approval, with restrictions on equity participation and capital and dividend

remissions. The basic rules on foreign investment are laid down in the For-
eign Private Investment (Promotion and Protection) Act 1976. The Protection
of Rights in Industrial Property Order 1979 and the Protection of Economic
Reforms Act 1992 provide legal guarantees against compulsory acquisition or
takeover of foreign investments by the government. Foreign investors may, at

any time, repatriate their capital, including profits and appreciation, in the
currency of the country in which the investment originated. Work permit re-
strictions on expatriate managers have been withdrawn and salary and wage
remittance restrictions have been eased. Equal treatment is accorded to for-
eign investors in the application of laws, rules, and regulations relating to
import and export of goods.
Pakistan Trade Performance, 1980-1996
Pakistan's exports fluctuated widely during 1980-1996, increasing as

high as 25.0 percent and falling as sharply as 16.7 percent (see Table 2). Des-
pite yearly fluctuations, the 1980s recorded a satisfactory export growth of
8.5 percent per annum. However, a careful analysis would reveal two distinct
behavior patterns of export earnings during the 1980s. During the first half
of the 1980s, Pakistan's exports hardly registered any growth, creeping up at
a mere 2.1 percent per annum. This unsatisfactory performance is
Table 2: Basic Information about Pakistan's External Trade
% Share in GDP
Exports Imports Growth Rate Growth Rate
Year (million$) (million$) of Exports (%) oflmports (%) Exports Imports
1980/81 2957.5 5408.5 25.0 14.1 10.5 19.2
1981/82 2464.3 5622.1 -16.7 3.9 8.1 18.3
1985/86 3069.8 5634.5 23.2 -4.6 9.6 17.7
1990/91 6130.6 7619.0 23.7 9.9 13.5 16.8
1991/92 6904.0 9251.6 12.6 21.4 14.2 19.0
1992/93 6813.5 9941.0 -1.3 7.4 13.2 19.3
1993/94 6802.5 8564.4 -0.2 -13.8 13.1 16.5
1994/95 8137.0 10394.0 19.6 21.4 13.4 17.2
1995/96 8707.0 11805.0 7.0 13.6 12.8 18.6
Sources: Ministry ofCo=erce (1995, 1997a).

attributable to world recession and to shortfalls in the output of major export

items (see Khan 1995 for a detailed discussion). Exports recovered their
growth momentum during the second half of the 1980s, increasing at an ave-
rage rate of 15.0 percent per annum. During the first six years of the 1990s,
Pakistan's exports performance was encouraging, growing at an average rate
of 10.2 percent per annum. The performance would have been even better
had cotton not been affected by pest attack during 1992 and 1993.
Like exports, imports growth also fluctuated widely during 1980-1996,
rising by 21.4 percent and falling by 13.8 percent (see Table 2). Imports grew
by an average rate of 4. 7 percent during the first half of the 1980s and by 3. 7
percent during the second half of the 1980s. The slowdown in import growth
during the second half of the 1980s was due mainly to a fall in world prices of
4
Pakistan's major import items. The first six years of the 1990s witnessed a
respectable growth of 10.0 percent per annum mainly due to the extraordi-
nary increase in machinery imports (60%), particularly textile machinery
(115%) and chemicals (18.3 percent) in 1991; and transport equipment under
the so-called "Yellow Cab Scheme" (50%) in 1992. These three items
accounted for 52 percent of total imports. The adoption of a liberal import
policy coupled with reduction in tariffs and improvement in the investment
climate contributed to a record increase in imports during these two years.
The equally sharp reduction of import bills in 1993 was the result of a
decline in the imports of machinery (-22%), particularly textile machinery
(-55%) as a result of overimportation during the previous two years; transport
equipment due to the scrapping of the ''Yellow Cab Scheme" (-33%)5; and pe-
troleum and petroleum products (-9%) as a result of decline in its price by 21
percent.
Pakistan is not a major trading player in international trade. It accounts
for, on average, only 0.15 percent of world exports and 0.26 percent of world
imports (see Table 3). However, careful analysis suggests that Pa.kistan i~ _a
major trading player in some export items. For example, Pakistan accounts
for 17.0 percent (on average) of the world market of carpets and rugs, a share
that has continuously declined from 23.14 percent iii 1980 to 13'.67 p~rcent\;y
1995. On the other hand, Pakistan accounts for 2.2 percent of the world
market of textile and clothing, a share which has been rising continuously
4. The unit price of import of petroleum and petroleum products and edible oils declined by the
compound growth rate of almost 3 percent per annum during the second half of the 1980s. The share
of these two items in total imports amounted to almost 25 percent during the period.
5. In order to provide self-employment to unemployed educated youth, the government then
introduced the "Yellow Cab Scheme". Under the scheme, approximately $542 million worth of addi-
tional motor vehicles were imported, which raised the total import bill on this item from an average of
$450 million to $992 million in 1992. These vehicles were distributed to unemployed youth who were
supposed to pay back the cost of vehicles in several installments.
Pakistan 81
over time, from 1.2 percent in 1980 to 2.13 percent in 1995. Pakistan is also a
relatively important player in the exports of leather and leather goods,
accounting for 2.6 percent of world exports. It also accounts for 0.5 percent of
the world market of fish and fish products (see Table 3).
Table 3: Share of Pakistan's External Trade in World Market

(percent)
Share in the
World Market Share of Major Exports in World Exports
Year Expodi. Impo1:ti. Texti]e and Carpets and I.eathe:c and Eish and Eish
Clothing Rugs Leather Goods Preparation
1980 0.13 0.28 1.19 23.14 2.26 0.42
1985 0.14 0.31 1.16 20.73 3.11 0.60
1990 0.16 0.21 1.64 17.34 2.83 0.37
1991 0.18 0.23 2.25 19.32 2.54 0.34
1992 0.20 0.24 2.26 15.16 2.16 0.41
1993 0.21 0.25 2.34 10.97 1.89 0.61
1994 0.20 0.20 2.35 15.42 1.84 0.39
1995 0.18 0.20 2.13 13.67 1.55 0.36
Source: Ministry of Commerce (1997b).
Commodity Concentration
Pakistan's exports are highly concentrated on a few items. As shown in

Table 4, eight categories of exports accounted for 85-90 percent of total export
earnings. More interestingly, the cotton group alone accounted for 57 percent
of export earnings followed by leather (8.5%), rice (7.0%), and synthetic tex-
tile (5.2%). Thus, these four items together accounted for almost 78 percent
of total export earnings. Further disaggregation in the cotton group revealed
that textile and clothing constituted 99 percent of total cotton group export
earnings. These two items are therefore the backbone of Pakistan's export
sector. Such a high degree of concentration of exports in a few items has led
to severe instability in export earnings. A poor cotton crop seriously affects
total export earnings, as was experienced during 1992 and 1993, when total
exports actually registered a decline.
Table 4: Pakistan's Major Exports

(percentage share in total exports)
Commodities 1980 1985 1990 1991 1992 1993 1994 1995 1996
Cotton group 41.0 49.3 60.1 61.0 61.3 59.8 57.9 58.7 64.1
Raw cotton 14.2 11.2 8.9 6.7 7.5 4.0 1.2 0.8 5.8
Textile 20.2 23.3 29.0 31.6 30.3 30.3 31.9 33.2 33.4
Clothing 6.6 14.8 22.2 22.7 23.5 25.5 24.8 24.7 24.9
Rice 17.9 8.9 4.8 5.6 6.0 4.7 3.6 5.6 5.8
Leather and leather

products 6.7 8.6 9.8 9.1 8.6 9.3 9.3 8.0 7.2
Wool and carpets 9.8 6.1 5.0 3.8 3.5 2.6 2.4 2.6 2.6
Raw wool 0.4 0.7 0.3 0.1 0.1 0.1 0.2 0.1 0.1
Carpets and rugs 9.4 5.4 4.7 3.7 3.4 2.5 2.2 2.5 2.5
Fish and fish

preparation 2.5 3.3 1.9 1.9 1.7 2.7 2.3 1.9 1.6
Surgical goods 1.0 2.0 1.4 1.4 1.3 1.5 1.4 1.4 1.4
Sports goods 1.1 1.8 2.2 2.2 2.0 1.9 2.9 3.2 2.8
Synthetic textile 0.2 1.7 4.3 5.7 6.1 7.4 9.5 7.1 5.2
Others 20.0 18.3 10.5 9.3 9.5 10.1 10.7 11.5 9.3
Sources: Ministry of Commerce (1995, 1997b).
Pakistan's imports are also concentrated on a few items. As shown in

Table 5, only 10 categories of imports accounted for almost 80 percent of total
imports. A further look at Table 5 suggests that five items, namely, machin-
ery, petroleum and petroleum products, chemicals, edible oils, and transport
equipment together accounted for 61 percent of total imports during 1990-
1996.
Structural changes have taken place in some categories of imports dur-
ing the 15 years. For example, the shares of fertilizer, petroleum and petro-
leum products, electrical goods, and transport equipment in total imports
have declined over time mainly due to the rise in domestic production of these
items. On the other hand, the shares of machinery, edible oils, chemicals, and
electrical goods in total imports have increased due to the expansion of the
industrial sector in the country as well as the rise in per capita income.
Pakistan 83
Table 5: Pakistan's Major Imports

(percentage share in total imports)
Commodities 1980 1985 1990 1991 1992 1993 1994 1995 1996
Fertilizer 6.6 2.0 3.0 3.5 2.8 2.5 3.1 1.2 3.0
16.8 22.1 15.0 16.3 16.3 15.3 16.9
Petroleum and products · 22.8 24.2

Machinery (nonelectrical) 11.9 15.0 17.1 17.7 23.7 21.5 18.6 20.1 17.9
Transport equipment 10.4 8.7 6.8 6.7 9.0 12.7 9.7 8.6 4.7
Edible oils 4:9 7.7 5.6 5.3 4.4 5.9 5.7 9.6 7.2
Chemicals 1.9 6.2 10.3 9.0 9.6 9.0 8.9 10.2 11.5
Iron, steel, and products 6.4 4.4 4.7 4.1 4.5 3.8 4.6 4.6 5.2
Grains, pulses 2.2 3.2 6.2 2.3 4.3 5.5 3.4 4.8 4.7
Electrical goods 4.1 2.8 2.9 2.9 3.2 2.7 3.4 2.7 3.7
Drugs and medicines 1.6 2.2 2.5 2.6 2.3 2.3 2.7 2.5 2.8
Others 27.2 23.6 24.1 23.8 21.2 17.8 23.6 20.4 22.4
Sources: Statistical Supplement: Economic Survey 1994-95, Government of Pakistan (1995), Ministry
of Commerce (1997a).
Direction of Exports and Imports
Although Pakistan is trading with a large number of countries, its

exports and imports are highly concentrated in a few countries. More than
two thirds of Pakistan's exports and imports are concentrated in a group of 12
major trading partners. Further disaggregation reveals that almost 4 7 .5 per/
cent of Pakistan's exports went to the European Union (EU) and North /
America during 1990-1996, followed by 7.6 percent to Japan. Similarly,;37.1
/
percent of Pakistan's imports came from the EU and North America f91lowed
by 12.9 percent from Japan during the same period. In other words, almost 55
percent of Pakistan's exports and 50 percent of imports went to/and came
from the EU, North America (mainly US), and Japan, respectively.
Commodity and regional exports of 16 items are documented in Table 6.
These items account for almost 80 percent of total exports and are mostly ex-
ported to the EU, North America, Japan, and other Asian countries during
1990-1996. Further disaggregation reveals that more than three fourths of
made-ups, hosiery, readymade garments, leather manufactures, and carpets
and rugs are exported to the EU and North America, followed by leather (52.1
percent), artsilk (53.1 percent), and cotton fabrics (29.5 percent).
Table 6: Shares of Pakistan's Major Exports to the EU, Japan,

North America, and Other Asian Countries
Made-up Ready-
Country/ Raw Cotton Cotton Excluding Towels Hosiery Cotton made
Region Cotton Yarn Fabrics Towels Bags Garments
1995/96
EU 3.1 3.6 19.0 17.6 25.2 36.5 60.2 42.0

Japan 5.5 23.8 3.8 1.1 3.2 0.2 0.4 0.3
North America 1.9 2.8 12.2 51.4 47.2 53.9 9.3 41.4
Other Asia 45.6 47.7 32.3 8.6 6.2 3.0 5.7 5.5
1994/95
EU 2.4 4.1 16.3 51.7 25.2 35.5 65.9 43.5

Japan 6.0 23.7 3.9 0.8 4.1 0.1 0.5 0.3
North America 2.7 12.6 25.2 47.6 55.1 12.5 41.8
Other Asia 40.7 42.9 37.4 4.4 13.0 2.6 4.7 7.4
1993/94
EU 2.5 3.9 17.1 58.7 31.5 43.5 67.6 46.7

Japan 6.7 28.8 5.5 0.8 4.4 0.1 1.2 0.3
North America 3.0 11.5 21.3 40.3 51.6 7.0 31.6
Other Asia 33.7 37.3 39.0 7.0 8.9 4.1 7.6 10.0
1992/93
EU 1.9 4.4 19.5 40.0 31.6 44.5 56.0 45.5

Japan 13.3 24.5 2.7 0.8 2.9 0.2 0.4 0.4
North America 0.1 4.0 9.8 12.7 38.6 43.4 7.2 33.5
Other Asia 32.5 34.4 37.7 9.8 10.1 6.5 7.6 12.2
1991/92
EU 6.3 5.0 18.5 49.1 29.5 45.8 57.5 45.5

Japan 9.3 32.3 2.5 1.8 4.0 0.4 0.4
North America 0.1 2.3 12.1 21.7 36.1 45.7 2.5 27.8
Other Asia 56.7 37.3 36.2 12.2 13.8 11.2 24.9 14.1
1990/91
EU 6.3 2.5 15.3 52.6 25.4 47.6 67.3 50.4

Japan 12.3 26.4 2.8 1.0 5.4 0.2 0.4
North America 1.3 13.0 29.2 32.5 33.4 4.0 27.3
Other Asia 73.6 35.3 26.1 6.1 10.4 3.7 3.9 7.5
1995/96
EU 3.1 0.6 43.0 57.1 35.2 34.6 52.2 41.6

Japan 4.1 2.0 10.6 16.1 1.6 0.7
North America 0.8 1.1 5.6 14.3 31.7 11.6 21.3 9.5
Other Asia 54.4 34.4 24.6 4.2 4.0 15.3 3.0 20.3
(continued next page)

Pakistan 85
Table 6. (cont'd.)
Leather Fish and Artsilk and

Country/ Tents and Manufac- Carpets Fish Pre- Sports Synthetic
Region Canvas Rice Leather tures and Rugs parations Goods Textile
1994/95
EU 4.7 1.7 45.5 34.0 35.2 33.0 49.9 41.6

Japan 0.2 3.1 0.5 7.3 22.3 3.4 0.9
North America 5.2 1.4 6.1 21.1 37.9 14.6 22.3 13.3
Other Asia 38.0 42.1 24.4 14.5 4.9 16.4 3.5 14.6
1993/94
EU 5.9 2.5 46.5 52.6 45.8 27.0 47.1 36.3

Japan 0.4 2.9 2.4 6.5 26.5 6.1 0.3
North America 1.7 1.9 6.7 19.0 29.9 11.6 23.1 11.6
Other Asia 57.8 38.6 25.7 6.2 4.6 30.3 3.9 36.5
1992/93
EU 2.1 2.1 46.7 56.7 46.6 18.4 47.5 37.5

Japan 0.5 3.4 2.4 6.2 27.3 3.8 0.3
North America 4.5 1.5 7.5 25.0 28.5 8.0 23.4 13.0
Other Asia 72.7 53.2 21.8 4.9 4.3 34.4 3.7 33.4
1991/92
EU 2.8 2.7 42.9 60.6 44.4 24.0 47.5

Japan 0.2 4.9 2.9 5.8 25.5 0.3
North America 0.4 2.5 5.2 22.8 32.0 14.5 9.1
Other Asia 60.7 45.9 22.8 5.6 4.7 20.3 27.8
1990/91
EU 2.2 1.2 51.8 67.4 43.6 26.7 49.7

Japan 0.3 0.1 4.9 2.8 6.6 24.5 0.2
North .America 0.2 0.4 5.3 13.4 25.5 19.4 8.0
Other Asia 86.9 42.3 13.4 1.6 4.3 21.2 14.6
Source: Ministry of Commerce The State of Pakistan's Foreign Trade (various issues).
Commodity and regional imports of seven major commodities accounting

for three fourths of total imports during 1990-1996 are presented in Table 7.
It can be noted that Japan has been the single largest supplier of transport
equipment to Pakistan, accounting for almost 61 percent, followed by the
combined supplies of the EU and North America. Almost 74 percent of petro-
leum and petroleum products are imported from Other Asian countries,
prominent among them are Kuwait, Saudi Arabia, Iran, Qatar, and Bahrain.
As regards machinery, 38.7 percent of imports came from the EU, followed by
Japan (19.1 %), other Asian counties (16.4%), and North America (7.9%).
Like machinery, the EU is the single largest supplier of chemicals
(33.6%) and drugs and medicine (44.4%); followed by other Asian countries
(23.2% and 14.5%, respectively). Malaysia has been the single largest supplier
of edible oils to Pakistan, accounting for almost 78.3 percent of total imports.
Almost 47 percent of fertilizer imports originated from North America, i.e.,
from the US followed by other Asian countries (7.4%) and the EU (6.7%).
Table 7: Shares of Pakistan's Major Imports from the EU, Japan,

North America, and Other Asian Countries
(percent)
Petroleum
Country/ Transport and Petroleum Edible Drugs and
Region Equipment Products Machinery Chemicals Oils Fertilizers Medicine
1995/96
EU 8.1 0.3 31.1 25.1 2.5 39.9

Japan 70.6 0.1 19.2 8.7 2.9
North America 8.0 0.1 7.6 6.7 0.1 31.5 8.4
Other Asia 4.9 48.3 14.7 22.7 86.1 5.4 5.5
1994/95
EU 13.9 0.7 47.9 39.1 1.1 4.3 52.8

Japan 56.8 0.1 14.4 8.2 10.1 4.1
North America 7.8 0.1 7.3 6.5 4.9 54.8 8.3
Other Asia 11.0 79.2 17.8 29.0 82.7 4.0 16.2
1993/94
EU 19.6 0.9 40.3 32.2 0.5 4.9 46.0

Japan 49.0 0.1 16.8 7.6 0.3 5.4
North America 13.4 0.5 7.6 6.9 9.2 59.1 8.8
Other Asia 11.6 92.4 20.7 27.0 83.8 12.8 17.6
1992/93
EU 14.9 12.2 36.7 34.1 2.5 12.3 43.2

Japan 59.6 0.1 21.5 7.6 4.2
North America 6.5 3.2 5.6 8.7 45.3 10.6
Other Asia 16.6 73.3 16.7 22.2 77.6 10.6 16.1
(continued next page)

Pakistan 87
Table 7. (cont'd.)
Petroleum
Country/ Transport and Petroleum Edible Drugs and
Region Equipment Products Machinery Chemicals Oils Fertilizers Medicine
1991/92
EU 31.0 7.2 36.7 37.0 4.7 4.8 47.1

Japan 51.6 0.1 23.0 9.1 1.5 4.0
North America 8.1 3.0 8.6 9.4 5.9 49.2 11.4

Other Asia 6.2 83.7 14.8 20.1 80.9 5.6 15.3
1990/91
EU 8.3 8.0 39.6 33.9 1.3 11.2 37.4

Japan 78.2 0.6 20.0 7.5 3.3 4.4
North America 4.7 9.6 10.4 10.2 31.0 44.1 11.9
Other Asia 6.3 66.4 14.0 18.2 58.5 6.2 16.4
Note: ... means data not available

Source: Ministry of Commerce The State of Pakistan's Foreign Trade (various issues).
The Uruguay Round Agreement and Its Implications
Trade barriers are likely to fall and global trade is likely to expand as a
result of the Agreement. The Agreement would discipline the use of subsidies,
countervailing measures, and technical barriers; tighten antidumping rules
and eliminate certain restrictive trade-related investment measures; regulate
the use of restrictive safeguard actions; strengthen and clarify procedures for
the settlement of trade disputes among members; and increase the transpar-
ency of national policies. Special dispensations for the developing countries
are available to give them enough time to adjust to the post-UR realities. The
developed countries (DCs) have pledged to pursue more liberal trade policies
so that imposing protection against the LDCs' exports will now be more diffi-
cult than it would have been otherwise.
Economic Implications of the Agreement
Whereas the UR Agreement has assured Pakistan greater access to markets

in developed countries, it will have to compete with other exporters, both from
DCs and other LDCs in those markets, especially in products
currently under quantitative restrictions. Moreover, in those areas (including tex-
tiles, agriculture, and labor-intensive services) that offer a greater scope of expan-
sion of international trade to Pakistan are the ones where the access to the devel-
oped countries' markets and the concessions granted by the DCs have been mini-
mal. Thus, the prospects of economic growth in the post-UR period are not very
favorable, at least in the medium term.
Market Access
The achievements of the Agreement in the area of tariff reductions and

concessions received from the Organisation for Economic Co-operation and

Development (OECD) and other developing countries are reported in Table 8.
The estimates are based on most favored nation (MFN) tariff reductions
weighted by Pakistan's trade with the OECD and developing countries. Paki-
stan's major exports receive significant tariff reduction from the developing
countries. Tariffs facing basic manufactures such as textiles and clothing will
decline by 8.9 percent, agricultural products by 5.1 percent, minerals and fu-
els by 13.3 percent, and miscellaneous manufactures by 7 .5 percent. In the
OECD countries, tariffs on basic manufactures are expected to be reduced by
2.2 percent making the export weighted average post-UR tariff as 6.5 percent.
In other major exports such as agriculture and miscellaneous manufactures,
tariffs are expected to decline by 3.6 percent and 2.5 percent respectively.
Thus, the average post-UR tariff for these products are likely to be 3.4 per-
cent and 10.8 percent, respectively. As a result, Pakistan's total merchandise
exports to the OECD and developing countries will benefit from a weighted
average tariff reduction of 2.4 percent and 6.9 percent, respectively. Conse-
quently Pakistani exports will face a tariff of 6.9 percent in OECD markets
and 9.1 percent in developing countries' markets.
A significant change brought about by the Agreement is the reduction of
non tariff barriers, particularly due to phasing out of the MFA. Since
removal of complete MFA will take place by the end of 2004, immediate ef-
fects of trade liberalization on this account will not be very significant. How-
ever, Low and Yeats (1994) show that the proportion of Pakistan's exports
affected by existing nontariff barriers (NTBs) should fall from about 60 per-
cent in 1992 to 8 percent in 2004 as a result of the implementation of the
Agreement.
Pakistan's schedule of tariff binding levels shows an increase in bindings
both in terms of tariff lines and import coverage. Pakistan has committed to
bind 33 percent of total tariff lines. It has established a ceiling binding on
most of the agricultural commodities and most of the bound tariffs are at 100
percent. Hence, the UR bindings for agricultural commodities are not used as
a tool for trade liberalization. A significant proportion (i.e., 75 percent) of
Pakistan's tariffs for manufactured goods remain unbound. For
Table 8: Tariff Reductions and Concessions Received from OECD

and Other Developing Countries for Pakistan's Exports
By OECD Countries By Selected Developing Countries
Export Export Value Export Export Value

Weighted Percent of Weighted of Weighted Percent of Weighted of
Average Tariff Exports Average Tariff Export Average Tariff Exports Average Tariff Exports
Summary Category (1 Digit SITC) Reduction Affected Post-UR ($'000) Reduction Affected Post-UR ($'000)
Agriculture (0+1+2+4-27-28) 3.6 16.3 3.4 556,000 5.1 39.2 11.8 435,000
Fertilizers, minerals, ores, scrap 3.4 0.6 0 106,000 13.7 68.3 13.2 3,680
(27+28)
Mineral fuels etc. (3) 2.2 0 1.3 2,070 13.3 0.6 3.9 24,600
Chemicals (5) 3.6 70 7.3 6,630 11.3 9.9 12.9 6,270
Basic manufactures (6) 2.2 82.5 6.5 1,430,000 8.9 22.7 7.3 654,000
Machines, transport equipment (7) 6.6 87.9 0.4 52,000 7.4 19.0 12.6 3,800
Miscellaneous manufactured goods (8) 2.5 90.9 10.8 679,000 7.5 12.5 13.3 10,900
Goods not classified by kind (9) 2.8 90.4 2.2 104 13.3 4.7 4.9 212
All merchandise trade 2.4 70.8 6.9 2,740,000 6.9 28.5 9.1 1,140,000 ~
~
&;·
Source: lngco and Winters (1995). ....Q
;:s
00
tO
manufactured goods, Pakistan's bindings are mostly in the range of 40-50

percent, while for imports of a number of mineral products leather items
luggage, wood products, and some textile and certain transport ' equipment,'
tariffs will be bound at ceiling rates of either 20 or 30 percent. Pakistan's
commitment to trade liberalization is much lower than it has committed with
the International Monetary Fund. In any case, domestic adjustments in the

aftermath of implementation of the Agreement will have far-reaching impact
on trade and production sectors of the economy. It is expected that the
imports bill will rise because of the demise of some local industries, as im-
porting becomes more profitable than producing in the country. Furthermore,
some of the goods earlier imported through illegal channels will enter the
country through legal channels. However, if local industry restructures itself
in an efficient manner, then the negative impact will be lesser.
Agreement on Textile and Clothing
The Agreement on Textile and Clothing (ATC) provides for the integra-
tion of the Multi-fibre Arrangement (MFA) with the WTO system and its
gradual conformity to its rules. The MFA, which operates through a complex
of quotas restricting LDCs' exports of clothing and textiles to quota countries,
has been in place since 1974. According to the ATC, the MFA is to be phased
out by the year 2004 in stages. 6 In each phase, the importing country will
transfer from the MFA to normal WTO rules a tranche of products in a size
related to the share of the items in its total 1990 import volume. The agreed
phasing rule will allow the quota countries to delay into the next century the
bulk of such transfers. For instance, only 31 percent of the textile products
will be integrated by the US in the first nine years and the remaining 69 per-
cent will be integrated in the last year. In fact, in the first stage of integra-
tion, products which were not subject to MFA restrictions were integrated
first, while the integration program of more sensitive products in each cate-
gory has been postponed. Moreover, the share of clothing has been minimal in
the list of integrated products. This kind of integration process will certainly
not be very beneficial for countries like Pakistan. Increased market access
6. The expected result of the MFA's inclusion in the WTO will be the elimination of existing
quotas, and then a gradual lowering of existing tariff barriers on textiles and clothing entering the
quota markets. Besides cutting the high tariff rates on textiles, the DCs have promised to bring down
tariffs on textiles from the present range of 25-35 percent to 5-12 percent along with a reduction in a
tariff escalation. On the other hand, the LDCs have pledged to reduce average tariff by 23 percent,
i.e., from 14.6 percent to 11.3 percent. The Agreement also seeks to remove the growing misuse of
antidumping actions. In this regard the importing country will be required to establish a clear rela-
tionship between the dumped imports and the injury they cause to the domestic industry. A Textiles
Monitoring Body has been established to oversee the implementation of these commitments.
Pakistan 91
that would be available through the full implementation of the ATC, com-
mensurate with Pakistan's comparative advantage in the textile and clothing
sector, would be very helpful for the growth of the economy.
On the other hand, exporters will now have a greater responsibility to
prevent illegal efforts to divert their exports through third countries using
false labeling of origin. For instance, the definition of country of origin has
been changed from where the garment is cut to one where the sewing is done;
this is going to discourage the outward processing of products (see Pana-
gariya et al. 1996). Similarly, gray cloth exported by Pakistan to EU and

processed in EU to be shipped to the US will now be counted against Pakis-
tan's quotas. While the extent and strictness of enforcement of circumvention
is not clear, there are signs of more strict interpretation of this requirement
as evidenced by the 1 July 1996 move of the US in which it notified WTO
about the new rules of origin. This action can adversely affect exports of tex-
tiles and clothing during the phasing-out period.
Pakistan's MFA quota utilization rates are high and its textile and
clothing exports are strongly oriented toward restricted markets. 7 Table 9
reports the distribution of textiles exports between the quota and nonquota
countries and the MFA quota utilization rates by products and countries. A
cursory look at Table 9 shows very high quota utilization rates, which sug-
gests that the MFA is a binding constraint on Pakistan's textile and clothing
exports. 8 Moreover, the distribution of textiles between the quota and non-
quota countries shows that it is in the category of made-ups-which are also
relatively higher value-added items in the textile group-that quotas hurt
Pakistan's exports the most, mainly because of concentration of these exports
in the quota countries. Thus, Pakistan should benefit greatly from the even-
tual removal of the MFA.
The changes in Pakistan's quota on textile and clothing exports under
the normal growth rates without the ATC and with the ATC suggest that be-
tween 1994 to 2004 without the ATC, the normal increase will be 48.8 percent
in the EU, 82 percent in the US, and 89.9 percent in Canada. However, as a
result of the ATC these growth rates will rise to 79.2 percent, 139.7 percent,
and 155.6 percent, respectively. In the case of clothing, Pakistan's quota
would have grown normally without the ATC by 70.8 percent in the EU, 87.7
percent in the US, and 82.6 percent in Canada. On the other hand, under the
ATC, these growth rates will be 118.5 percent, 150.0 percent, and
7. Over 63 percent of Pakistan's textile and apparel trade is subject to restraints. In approval,
almost 82 percent of all apparel imported from Pakistan is subject to quantitative restrictions (see
Stack 1996).
8. Erzan et al. (1990) report a working definition of a binding quota as the utilization rate of 90
percent or above.
143.5 percent respectively. For both textiles and clothing, Pakistan will have
additional market access with the elimination of MFA to about 62 percent
and 67 percent, respectively (for details, see Khan and Mahmood 1996).
Table 9: The Distribution of Textiles Exports between Quota

and Nonquota Countries
Nonquota Countries Quota Countries Quota Utilization

a
Textiles (percent) (percent) Rates
Yarn 95 5 99.4
Fabrics 72 28 99.8
Made-ups 29 71 98.lb
Note: 'Quota utilization of yarn and fabrics is for EU while made-ups and clothing are for US
(1987).
blncludes both made-ups and clothing.
Source: Naqvi and Mahmood (1995).
Notwithstanding these potential gains from liberalization, Pakistan will

face severe competition in the export of made-ups textiles and clothing from
People's Republic of China and other South and Southeast Asian countries with
the elimination of the MFA. Furthermore, its textile exports are likely to face
9
serious restriction through the ISO 9000 rules. Unless manufacturers and ex-
porters start using standardization and quality controls, Pakistan's exports will
perpetually remain under the ominous threat of quality sanctions.
Agreement on Agriculture
The UR Agreement has brought trade in agricultural commodities

under the GATT discipline. The Agreement has undoubtedly set the scene for
liberalization and created conditions that will restrain further growth in agri-
cultural protectionism. However, it has done little to actually liberalize trade
because of the way the tariffication exercise was undertaken: countries in-
flated tariff equivalent calculations such that they are more than compen-
9. The ISO 9000 is a quality standard that is being espoused by the world to foster good manu-
facturing practices and quality safeguards in all processes both in the manufacturing and services
sectors. Only a few companies in Pakistan have been certified as conforming to ISO 9000 standards,
mainly because of the lack of knowledge on such standards and the fact that they have not so far faced
these restrictions.
Pakistan 93
sated for the measures they were replacing, and would ensure that the tariff
reductions required under the Agreement will have little effect on the actual
level of protection (Low 1995).
In the post-UR period it is expected that Pakistan's agricultural products
would fetch higher prices over the longer term as a result of freer trade but it
will face increased competition from other agricultural-commodity- exporting

LDCs. The US Department of Agriculture estimates that the farmgate price
of rice will be 12-13 percent higher in 2000 than it would be without the UR
agreements. It also estimates that one third of the increase in world imports
will be long-grain rice, a variety where Pakistan's interest lies (see United
Nations 1995). The prospects of Pakistan getting a share of the rice markets
in Southeast Asia are rather remote because the variety of glutinous rice
popular there is not produced in Pakistan. The quality consideration will also
prevent Pakistan in gaining market share in this region. Thus, the opening
up of the rice markets in Indonesia, Japan, and Republic of Korea is unlikely
to create any major new opportunities for Pakistan in the immediate future.
Access to the EU is expected to remain unchanged. The EU has however,
agreed only to refrain from increasing current protection, keeping constant
the margin between the import price and support price. As far as exports of
raw cotton is concerned, Pakistan is likely to benefit because of the liberalized
market access in textile and clothing in the post-UR period. Therefore, ab-
sorption of cotton in the country as well as its export will not pose any major
problem. Pakistan can also benefit by exporting spices, flowers and plants,
where the DCs have agreed to reduce tariffs by 52 percent; and tropical nuts
and fruits, where commitment is made to reduce tariff by 37 percent. How-
ever, a fuller exploitation of Pakistan's export potential for these commodities
would require considerable streamlining in the areas of storage, transporta-
tion, and especially packaging which must conform to US and European
standards (see Azhar 1995).
Reduction in wheat subsidy would mean a higher import bill for Pakis-
tan, which is a net importer of wheat. Although the Singapore Ministerial
Conference has pledged to compensate the net food importing developing
countries from these negative effects, once commercial agricultural imports
find their application, Pakistan could end up experiencing a negative net ef-
fect.
The Agreements on Technical Barriers to Trade and Sanitary and Phy-
tosanitary Measures encourage the use of Codex Standards (food standards
aimed at global protection of consumers' health and economic interests, and
ensuring fair practices in the trade in food), and recognizes that protective
measures designed to protect human life and health are justified. With these
Agreements becoming a reality, Pakistan has to cover a lot of ground to
adjust itself to these Agreements. The work to strengthen export control

systems for food must receive top priority. The national system of control
must also be improved and transparency ensured. It is a fact that, like many
other developing countries, Pakistan is not in a position to ensure that food
products produced within the country meet the established Codex Standards
or are produced according to the codes of practice or guidelines of Codex.

Pakistan should take advantage of technical assistance that can be received
from international agencies such as the Food and Agriculture Organization
(FAO) and Codex (see Qayyum and Qureshi 1996).
Agreement on Trade in Services (GATS)
The GATS governs trade in areas including financial services, telecom-

munications, transportation, business services, professional services, and
construction. Participation in the GATS provides Pakistan an opportunity to
increase the economic efficiency of its services sector 10 , greater access to lower
cost/higher quality service inputs, and increased market access for its own
competitive service exports. Pakistan is likely to benefit from Article IV on
developing country participation, which is aimed at promoting their interest
by specific commitments made by the members, referring explicitly to the
provision of technology "on a commercial basis, to access to distribution chan-
nels and information networks" and to sectors of "export interest" to devel-
oping countries. Developed members are required to establish contact points
through which developing economies can seek technical assistance in the ar-
eas of services sector. Notwithstanding these attractions, the impact of the
UR Agreement remains to be determined as negotiations on several key
service sectors-including basic telecommunications, maritime services and
the movement of service firm personnel-are still continuing. These talks are
not likely to be concluded, in some cases up until the end of 1997.
In the area of financial services, Pakistan agreed to allow foreign banks
to undertake the activities subject to the conditions that:
• Pakistan will not grant national treatment to foreign banks;
• commitment regarding market access to foreign banks will be sub-

ject to the economic needs; and
10. Efficiency in the services sector will improve through increased competition, transfer of
technology, or expansion of resources, in particular physical and human capital.
Pakistan 95
• the grant of licenses to foreign banks will be conditional upon their

incorporation in Pakistan, with a maximum shareholding by for-
eigners not exceeding 30 percent of the total paid-up capital.
No consensus/agreement could be reached in the UR Agreement re-

garding financial services. Negotiations were held subsequently with the US,
EU, and other countries for improvements in financial services commitments.
Based on the negotiations, Pakistan submitted its revised schedule on finan-
cial services, which significantly improves its level of commitments. This re-
vised schedule was initially submitted on 16 June 1995 and was conditional
that Pakistan receive satisfactory commitments on (i) full MFN treatment
from most WTO members in financial services, and (ii) on movement of natu-
ral persons. In view of further negotiations, these conditions were subse-
quently modified to the effect that Pakistan's offer was made conditional on
most of the major countries adhering to their revised offer. So far, six out of
29 countries that tabled the revised offer have formally accepted or ratified
the revised offer made by Pakistan, while two have announced acceptance
subject to the ratification by their parliament.
The implications of the GATS for Pakistan would become clearer only af-
ter its implementation. However, if an agreement is reached only for the fi-
nancial services while those services where Pakistan has an interest (for
example, the labor-intensive construction sector) remain outside the Agree-
ment, then Pakistan will surely be a loser. Pakistan's service industry, espe-
cially banking and insurance, will be under great pressure especially when it
has to extend market access and national treatment to foreign banks and
• • 11
msurance.compames.
Trade-related Investment Measures (TRIMs)
Pakistan attaches great importance to foreign direct investment (FDI).

In recent years it has greatly liberalized the investment regime, permitting
up to 100 percent foreign equity participation. In 1995 Pakistan received
US$1.3 billion worth of FDI consisting of US$205 million as portfolio invest-
ment and US$1.1 billion as direct foreign investment. Besides, Pakistan al-
lows the issuance of shares, remission of dividends, and repatriation of
capital and profits. Although Pakistan attracts foreign investment by ex-
tending many attractive incentives to foreigners, it has been using some
TRIMs to induce multinational enterprises to meet a minimum level of
11. For a detailed discussion on GATS and its implications for Pakistan, see Khan and Mah-
mood (1996).
12
performance criteria. Pakistan maintains links between certain tariff ex-
emptions and local content requirements 13 in a number of sectors, including
automobiles, electronic goods, electrical goods, and machinery. These ar-
rangements will have to be eliminated in the five-year time. With the imple-
mentation of TRIMs it is expected that foreign investment in Pakistan will
grow at a faster pace.
Trade-related Intellectual Property Rights (TRIPs)

The main legal instruments utilized to protect intellectual property

rights (IPRs) are patents, copyrights, trademarks, industrial designs, trade
secrets, layout designs of integrated circuits, protection of undisclosed infor-
mation, etc. The purpose of ensuring IPRs is to encourage innovation and
creative expression by providing adequate rewards. With the expansion of
trade in intellectual property, abuses like trade in counterfeit goods, pirated
services, etc. have also escalated. In the absence of multilateral discipline,
countries where the intellectual property originated often resorted to unila-
teral and discriminatory actions against countries which violated intellectual
property. To address the problem, numerous international treaties on IPRs
including the Paris Convention for the Protection of Industrial Property
(1883) and the Berne Convention for the Protection of Literary and Artistic
Works (1886) came into existence. Most of these conventions are currently
administered by the World Intellectual Property Organization (WIPO).
The WIPO lacked effective powers to discipline signatories in case of
noncompliance, and as such IPRs were included in the GATT. Although Paki-
stan is not a signatory to the Paris and Berne Conventions, matters pertain-
ing to TRIPs are dealt with by three ministries: Ministry of Industries and
Production for patents, Ministry of Education for copyrights, and Ministry of
Commerce for trademarks. Pakistan will have to make significant changes to
its intellectual property regime. Amendments would include:
(i) introduction of both product and process patent protection for a period of
20 years 14 ; (ii) introduction of plant variety protection; (iii) increase in term of
protection for sound recording to 50 years; and (iv) introduction of protection
of service marks as trademarks.
12. TRIMs in Pakistan include local content reqtrirements, trade balancing requitements,
export performance reqtrirements, manufacturing limitations, and transfer of technology reqtrirements.
13. Local content requirements are contained in a deletion program. Under a deletion program,
entrepreneurs undertake to utilize a progressively higher proportion of domestically produced compo-
nents in the production of certain products, subject to specific incentives in the form of concessionary
tariffs on imports of raw materials and other components.
14. Currently, Pakistan's patent law only provides process patent protection for 16 years.
Pakistan 97
Due to the effective use of the Agreement on intellectual property rights,

it is expected that the prices of patented pharmaceutical products (medicine)
will rise between 25 to 67 percent in Pakistan. 15 Similarly, prices of agricul-
tural chemical products are expected to rise. To the extent these products are
subsidized, government will have to bear the additional burden of rising costs
of these products. Although the effects of the Agreement will only be felt after
20 years, the expected welfare loss for Pakistan can range from US$46-186
million. Moreover, some of the agreements reached so far may restrict Paki-
stan's access to scientific and technological knowledge. To meet this challenge

Pakistan will have to promote indigenous technology by making greater in-
vestment in R&D and restructuring its ailing inovation system.
GATS, TRIPs, and TRIMs have provisions on the control of anticompeti-
tive practices. These provisions are expected to affect FDI flows to Pakistan.
OECD has nonbinding rules on investment under its codes, with possible ef-
fects on third countries. A wide-ranging review of investment and competition
policies is due in the next 1-2 years under the WTO. It would be in the best
interest of Pakistan to participate actively in the forthcoming negotiations.
This would provide an opportunity for Pakistan to express its views and get a
fair accommodation of its interest in the process of integration or harmoniza-
tion of its competition policies with the rest of the world.
New Instruments of Protection
Antidumping and Countervailing Measures
There is widespread belief among academicians and policymakers that

the most serious threats to global free trade has come from the increasing use
(or misuse) of antidumping policy by the leading trading countries or region
such as the US, EU, Canada, and Australia (see Grimwade 1996, Panagariya
et al. 1996). The number of outstanding antidumping measures in the US in-
creased from 112 in 1985 to 236 in 1992. In Asian developing countries such
as People's Republic of China; Republic of Korea; Taipei, China; and Thai-
land, the use of antidumping measures are becoming more popular as they
have already taken many actions (see Panagariya et al. 1996 for further dis-
cussion). It is therefore feared that a further rise in antidumping actions
would erode the entire liberalization gains which are expected from the UR
Agreement. Pakistani textile products have been subject to
antidumping investigations by Brazil, EU, Japan, Mexico, South Africa, and
Turkey. Countervailing duty investigations have been conducted by
15. It may be noted that due to the arbitrariness of the assumptions, the estimates reported
here should be treated as illustrative. For details see Subramanian (1995).
Australia, Chile, and US. In most cases the investigation resulted in negative
determinations, and antidumping measures adopted by Turkey on cotton
yarn was withdrawn. However, a countervailing action by the US and anti-
dumping measures by South Africa (on printed bedlinen) are still in force. So
far Pakistan has never imposed antidumping or countervailing duties on any
of its imports. To date only one application for an antidumping action has
been reviewed by the National Tariff Commission on imports of jute from
Bangladesh.
The Commission is drafting an Antidumping and Countervailing Act.

This Act will take into account all the provisions of the UR Agreement. With
a view to preempting requests for antidumping action, the Commission also
plans to develop a data base containing independent information on interna-
tional prices so as to able to recognize "normal" or "below normal" values and
costs of production data along with historical production statistics to ascer-
tain "injury" to domestic industry and the causal link between the two.
Safeguards and Dispute Settlement
Pakistan considers the provisions on "dispute settlement" as a welcome

addition to the repertoire of policy instruments, as it would strengthen non-
discrimination among trading partners, make world trade more predictable
and transparent, and reduce the scope for unilateral action by stronger trad-
ing partners. Pakistan does not have a separate safeguard legislation. How-
ever, under paragraph 1.4 of the Import Policy Order 1994, "the Federal
Government may temporarily or permanently, suspend, whenever it deems
necessary in the public interest, the importation of goods which are otherwise
importable so as to prevent dumping, speculation, exaggerated imports, for-
mation of monopolies and the exploitation of the consumer or restrict imports
from countries resorting to discriminatory measures against Pakistani ex-
ports". Pakistan has never taken such a safeguard measure in the past.
The New Regionalism and Pakistan
Major Developments
The late 1980s attracted increased interest in regionalism, even at a

time when the most ambitious round of multilateral trade negotiations
(MTNs), the so-called Uruguay Round, was under way. The renewed interest
in regional integration has been attributed in part, to the increasingly cum-
bersome nature of MTNs as well as to the prospects for a successful conclu-
Pakistan 99
sion of the negotiation becoming uncertain (de la Torre and Kelly 1992, Pat-
terson 1989). One source of uncertainty has been the pace of the GATT nego-
tiations (the Uruguay Round started in September 1986 and was completed
in December 1993). Yet another source of concern was the GATT's de facto
consensus rule which countries liberally used to block progress until their
16
individual demands were met.
The successful conclusion of the Uruguay Round Agreement was ex-
pected to reduce the attractiveness of regional approaches and mitigate con-
cerns about the implications of economic integration for the multilateral

system and third countries (see, for example, WTO 1995, Bliss 1994, and
Bhagwati 1993). Surprisingly, with the successful conclusion of the Uruguay
Round and the establishment of the WTO, the interest in regionalism has not
waned. On the contrary, the integration process has been intensified in
Europe, North America, and Asia. The most celebrated recent preferential
trading arrangement (PTA) is the North American Free Trade Area
(NAFTA), signed by Canada, Mexico, and the United States in 1992 and in
force since January 1994. The full integration of Austria, Finland, and Swe-
den into the European Union in January 1995 is yet another development.
The Asian Pacific Economic Cooperation (APEC) forum agreed to achieve free
regional trade and investment by 2010, in the case of developed country
members, and 2020 by others. In Asia, ASEAN has accelerated implementa-
tion of its Free Trade Area scheduled to be completed by 2003, while the
South Asian Association of Regional Cooperation (SAARC) decided to reduce
barriers to mutual trade in a first group of 226 products in 1996. New inte-
gration initiatives were taken by the East Asian Economic Caucus (EAEC)
and countries bordering on the Indian Ocean rim. Several African, Latin, and
South American countries are engaged in a major revision and restructuring
17
process of their economic groupings.
Whether the proliferation of overlapping PTAs is a stepping stone to
global free trade consistent with the GATT principle or a hinderance to non-
discriminatory multilateral trade liberalization is a contentious issue on
which experts continue to differ (Srinivasan and Canonera 1995). 18 Notwith-
standing the difference of opinion, the fact is that the fever of regionalism has
taken firm hold. The view that regional integration is complementary to the
multilateral process is widely held among GATT contracting parties (Suther-
land 1995).
16. For more on this issue, see Hufbauer and Schott (1985) and Schott (1989).
17. For a comprehensive review of recent developments in economic integration, see Frankel
and Wei (1995), WTO (1995), Parrenas (1995), Rao (1995), UNCTAD (1995), de la Torre and Kelly
(1992), Park (1995), and Lawrence (1994).
18. Frankel and Wei (1995) have carefully reviewed the arguments on each side. See also
Panagariya et al. (1996) for both sides of the arguments.
The three regional blocs, namely, the EU, the NAFTA and the
ASEAN/APEC covering Europe, North America, and Asia, respectively, are of
19
major concern to Pakistan. The EU's market for Pakistan's exports of textile
and clothing and leather products is very critical. On average (1990-1996)
almost 25 percent of textile and clothing (which is 14 percent of total
exports) and 57 percent of leather products (which is 5.0 percent of total

exports) are exported to the EU market. Any development in the EU is bound
to affect Pakistan. Greater tariff escalation as a consequence of the Single
Market Programme in some industries such as leather and textile and cloth-
ing has placed Pakistan at a disadvantageous position in the EU's market.
With the accession of three new members to the EU, the patterns of restric-
tions in textile and clothing are likely to increase because of the extension of
the EU's bilateral agreement, which is comprehensive and
covers the entire range of MFA products with numerous quota restrictions.
Sweden, which had abolished MFA quotas, had to re-establish them for
developing countries. Liberalization of MFA quotas on textile and clothing
imports from the Central, Eastern, and Southeastern European countries as
part of the EU's Europe Agreements with these countries have already
accelerated after the Uruguay Round. These countries are likely to get pref-
erential treatment vis-a-vis other developing countries. All these develop-
ments are likely to affect Pakistan's exports of textile and clothing and
leather to the EU market.
The North American market is equally important for Pakistan, where
around 16 percent of its total exports and 18.5 percent of textiles and clothing
items went during 1990-1996. Leather is also a major export to this market.
Under the NAFTA agreement the existing trade restrictions are to be re-
moved against the intraregional trade of US, Canada, and Mexico but these
will continue to be applied to imports from Third World Countries (for exam-
ple, Pakistan). Pakistan faces, on average, slightly less than 20 percent tariff
on textile and clothing and leather products in the North American market.
The NAFTA has not only created important preferential margins but the re-
moval of MFA restrictions on Mexico's exports are most likely to displace
Pakistan's exports of textile and clothing and leather products in the North
American market.
19. A review of the recent development in three regional blocs is well documented in Khan and
Mahmood (1996).
Pakistan 101
Policy Options for Pakistan
In the face of rising economic regionalism and emerging trading blocs,

what are the policy options for Pakistan? As discussed in the preceding sec-
tion, the large economic spheres like EU, NAFTA, and APEC are likely to
have far-reaching implications for developing countries that are not members
of any of the three trading blocs. With the way the regional trading arrange-
ments are proliferating, it appears that the world trading system will be
truncated into three large economic spheres (EU, FTAA, and APEC) by the
year 2020. Even at the end of 1995 the world trading system has been trun-
cated into three economic spheres, i.e., EU, NAFTA, and APEC. Since the
three members (Canada, US, and Mexico) of the NAFTA are also the mem-
bers of the APEC, the world trading system has virtually been truncated into
two large economic spheres. As Table 10 shows, the three or two large trading
blocs consisting of 33 countries have accounted for almost 87 percent of world
exports and imports in 1995. The high concentration of economic power left
the rest of the countries in the world to compete for their shares in the re-
maining 13 percent of world merchandise trade. To survive in a new, emerg-
ing trading environment, the left-out developing countries including Pakistan
have limited policy options. Pakistan is fortunate enough to lie on the thresh-
old of two large and important regions, South and Central Asia, and is a
member of two corresponding regional groupings, SAARC and ECO (Eco-
nomic Cooperation Organization). The country's possible policy
responses can be identified as follows:
Table 10: Shares of Various Regional Blocs in World Merchandise Trade

(percent)
Exports Imports
Trading Blocs 1980 1990 1995 1980 1990 1995

EU(15) 37.2 44.6 40.4 41.0 44.7 37.1
NAFTA(3) 15.4 16.6 17.0 16.5 19.5 · 19.6
ASEAN (6) 3.5 4.2 6.1 3.1 4.6 6.6
APEC(18) 46.3 49.6
EU +APEC 86.7 86.7
World 100.0 100.0 100.0 100.0 100.0 100.0
Note: ... means data not available.
Source: World Trade Organization Annual Report 1996.
• The most important policy option for Pakistan and other

South/Central Asian countries is to speed up the process of domes-
tic policy reform. The idea is to make their economies attractive to
the outside world so that foreign investment can flow into these
countries. Such reforms in policies could help to cushion some of

the longer term effects of large economic blocs on the domestic
economy.
• Another important policy option for Pakistan and other South/ Central
Asian countries is to strengthen their less effective regional associations,
the SAARC and ECO. 20 Strengthening of the SAARC and ECO may be a
stepping stone to future integration into the world economy. Currently
the individual members of these blocs have very little bargaining power
vis-a-vis the three largest trading blocs (EU, NAFTA, and APEC). But a
more unified and integrated SAARC and ECO, perhaps even with a
common external tariff and speaking with a common voice, would com,
mand more attention.
• If Pakistan and other South/Central Asian Countries could pursue

their liberalization policy in a coordinated and multilateral way,
then these countries may strive to enter into an association agree-
ment (along the lines of the LOME convention between EU and
some African countries) with one or two of the three large trading
blocs (EU, NAFTA, APEC). Turkey, being the founder member of
the ECO, on the one hand and in custom union agreement with the
EU on the other, can serve as bridge between the ECO and the EU.
Such policy option will have the added advantage that it will be-
come easier to "lock-in" the liberalization in each of the countries in
that any reversal will jeopardize the association agreement (Srini-
21
vasan and Canonero 1995).
Physical propinquity notwithstanding, the South/Central Asian regions

present a dismal picture of intraregional trade. Mutual trade in the regions
has been stagnant over time, its value being slightly less than US$3 billion in
the case of the SAARC, and less than US$5 billion in the case of the ECO.
20. The members of the SAARC include India, Pakistan, Bangladesh, Sri Lanka, Nepal, Mal-
dives, and Bhutan. The members of the ECO are Pakistan, Iran, Turkey, and Afghanistan; including
six Central Asian Republics, namely Azerbaijan, Kazakstan, Kyrgyz Republic, Tajikistan, Turkma-
nistan, and Uzbekistan.
21. For a detailed discussion on policy options for Pakistan, see Khan and Mahmood (1996).
Pakistan 103
The share of intraregional trade to the world trade of countries of the regions
remained more or less stagnant around 3.0 percent during 1980-1996 and 5
percent during 1990-1994, respectively. Intraregional trade continues to re-
tain a marginal character in South/Central Asia.
Linking Labor Standards and Environment with Trade

The Uruguay Round multilateral trade agreement now faces new issues,
which include, in particular, the interface between labor and environmental
standards on one hand, and trade on the other. These issues arose principally
due to concerns about lower labor and environmental standards in the devel-
oping countries and their feared adverse effects on the developed countries.
Developed countries led by the US and supported by many countries of the
EU are advocating to include the issues of labor and environmental standards
in the WTO work agenda, on grounds that the full potential of the Uruguay
Round Agreements can only be exploited if every country enjoys a level play-
ing field.
Developing countries have thus far resisted such initiatives on the basis
that, if nontrade issues are dealt with in multilateral trade agreements, their
inability to meet the norms established by the developed countries could
subject their policies to challenge under the dispute settlement mechanism,
with the implied threat of trade sanctions, or open the door to a whole new
generation of trade remedies that could be applied with protectionist intent.
There is the added concern that overloading the trade policy instrument to
serve too many .diverse objectives, particularly those of a socioeconomic or
political character, could place severe strains on the multilateral trading sys-
tem (see Howse and Trebilcock 1996).
While agreeing that labor and environmental harmony is a basic need,
some feel that the WTO should not be the fora. Many argue that such efforts
will inevitably restrict trade. Notwithstanding this difference of opinions, the
increasing support of such standards in North America and EU have raised
the real possibility of such issues taking center stage at the WTO's future
work agenda.
Labor Standards and Trade
Attempts to link labor standards to international trade has a long his-

22
tory but little or no action was taken in the past. What has changed since
22. For a historical overview on labor standards and international trade, see Charnovitz
(1987).
the signing of the Uruguay Round Agreement to bring the issue at the fore-
front, only to be treated as priorities in the work program of the WTO (along-
side the issue of environmental standards and trade)? The answer is twofold.
Firstly, as trade liberalization progresses and the outcomes of the Uruguay
Round are being implemented, competitive pressures on developed countries
are increasing due to the lower labor costs in developing countries
(Grohmann and Koopmann 1994). Secondly, the economic conditions in de-

veloped countries have changed significantly during the 1980s and early
1990s. The protracted rise in unemployment in many European countries,

especially among unskilled workers, and a decline in real wages of this cate-
gory of workers in the US have led some observers to look for external
explanations, including "cheap" imports from developing countries. Further-
more, developed countries also fear that with the advent of freer trade, mul-
tinationals will move out to take advantage of the "cheap" labor in developing
countries, thereby adding further pressure on developed countries. They also
believe that competition with lower-standard countries will affect their own
standards as trade may shift to developing countries where the costs are
lower because of lower standards. Consequently, the countries with higher
standards may be forced to lower their own-a phenomenon referred to as
I
"race to the bottom" (Bhagwati 1995, Botsch 1995). j
The developed countries led by the US and supported by many European

countries including France, the international labor federations, and many
NGOs have argued for linking labor standards to the Uruguay Round agree-
ment and for addressing them within the framework of the WTO. Proposals
for legislation to link trade with labor and environmental standards have also
been introduced in the U.S Congress. The so-called "blue" and "green" bill is
introduced in the US Congress which would authorize the administration to
impose "social dumping" duties against lower labor (i.e., blue-collar workers)
standards abroad and "eco-dumping" duties against lower environmental (i.e.,
green) standards abroad (Bhagwati 1995).
The concern of developed countries regarding competition from exports
of developing countries and the consequent threat to jobs and declining real
wages has been overplayed (Rao 1995). As Bhagwati (1995) points out, the
real wages of unskilled workers have been falling steadily in developed coun-
tries for the last two decades due mainly to rapid technological change. The
experience in Europe has generally been similar in spirit. The relatively in-
flexible labor market caused unemployment to rise instead of real wages to
decline in the EU. Several recent surveys of this literature (Panagariya et al.
1996, Rao 1995, Lawrence 1995, Freeman 1995, Richardson 1995, and Burt-
less 1995) conclude that trade with low-wage countries is not a major
explanatory factor behind the observed trend in wages/unemployment of
Pakistan 105
unskilled workers in the OECD countries. The current consensus is that

technical change, not trade with developing countries, is responsible for the
decline in real wages in the US and growing unemployment in Europe, par-
ticularly among the unskilled. 23 As regards the flow of FDI to low-labor-
standard countries, there is little systematic evidence that lower labor stan-
dards attract FDI (see for example, OECD 1995, Bhagwati 1995, and Rao
1995 for further discussion on this issue).
What are Labor Standards?
Labor standards are norms and rules that govern working conditions
and industrial relations. Despite the lack of formal international consensus
on the list of labor standards, there appears to be some agreement that the
seven basic human rights conventions of the ILO listed below form the "core"
24
labor standards.
• Freedom of association (ILO Convention 1987) and the right of col-

lective bargaining (ILO Convention 1998)
• Prohibition of forced labor in the form of slavery and comptHsory
labor (ILO Conventions 29 and 105)
• Minimum age for employment which restricts child labor (ILO Con-
vention 138)
• Nondiscrimination in employment, i.e., the right to equal respect
and treatment for all workers (ILO Conventions 100 and 111)
These ILO Conventions are binding only in countries that have ratified
them. Pakistan has already ratified five out of seven ILO Conventions men-
tioned above. These include Conventions 29 and 105 on abolition of forced
labor, Conventions 87 and 98 on freedom of association and the right of col-
lective bargaining, and Convention 111 on nondiscrimination in employment.
Currently, Pakistan is examining two other Conventions, namely Convention
138 on minimum age that will restrict child labor, and Convention 100 on
equal remuneration, with a view to ratifying these Conventions as well. Paki-
stan also ratified the 1989 UN Convention on the Rights of the Child in No-
vember 1990. This, Convention is the most comprehensive legal instrument
available for the ptotection of children, and extends far beyond the issues of
child labor.
23. See for example, Bhagwati (1995), Rao (1995), Botsch (1995), Lawrence and Slaughter
(1993), and Bhagwati and Dehejia (1994) for a detailed discussion on this issue.
24. Panagariya et al. (1996) have described the ambiguity in the definitions oflabor standards.
Child Labor
The issue of child labor is complex, being not only an economic issue but
a social issue as well. It has gained considerable importance in recent years,
particularly after the signing of the UR Agreement. Child labor is of course
not desirable and should be discouraged. Nevertheless, it is a global rather

than a national phenomenon. In 1991, nearly 80 million children between 10
and 14 years were officially reported to be working around the world
(Ashagrie 1993). The problem is, however, more serious in developing coun-
tries, with the highest concentration of child labor found in the Asian coun-
25
tries, particularly South Asia. Some estimates of child labor put 44 million
for India, 3.3 million for Pakistan (see FBS 1996), 8 to 12 million for Bangla-
desh, and 2. 7 million for Indonesia. In Latin America, some estimates suggest
that about one quarter of the children may be working. In Brazil, about 7
million children are active in the labor market. Almost the same number of
children are found working in Mexico. The situation is not different in
Africa. In Nigeria, child labor is estimated to be 12 million. Child labor also
exists in some industrial countries. For example, Italy has highest number of
child labor in Western Europe. Spain has over 100,000 child workers
engaged mostly in agriculture. Similarly, illegal child work is reported in the
26
United Kingdom and US. Thus, it is a universal issue, the solutions to which
should be arrived at by all nations, taking into account the socioeconomic and
cultural norms of each country.
The Federal Bureau of Statistics (FBS) in collaboration with the Minis-
try of Labour, Manpower and Overseas Pakistanis, including the ILO, under-
took a nationwide survey of child labor in Pakistan during January-June
1996 under the International Programme on the Elimination of Child Labor
of the ILO. This comprehensive survey, the first of its kind in Pakistan,
covered a total of 140,298 households, the results of which were released on 9
October 1996. According to the survey, there were 40 million children aged 5-
14 as of 1 January 1996, representing almost 30 percent of the total popula-
tion. More than 50 percent of these children were in the 5-9 age group and
almost 72 percent were living in rural areas. Around 3.3 million, i.e., 8.3 per-
cent, were economically active during the reference week. Thus, child labor in
Pakistan is estimated at 3.3 million, of which 2.4 million (73%) are boys and
0.9 million (27%) are girls.
The cause of child labor in Pakistan is complex. While poverty is consid-
ered to be the fundamental reason, there are numerous other factors that
25. It is difficult to come out with the exact number for child labor because most of them work
in unregulated and unmonitored parts of the economy.
26. For a detailed discussion on the number of child labor, see Ghayur (1995).
Pakistan 107
have contributed to the persistence of child labor. These include nonavail-

ability of educational institutions, poor quality of education, large family size,
illiterate parents, high incidence of dropouts, and absence of a social safety
net. Unless these socioeconomic factors are tackled by the government, child
labor will continue to exist. Elimination of these factors will take time and
require money. It is therefore clear that child labor will decline only gradually
as the labor productivity and income of adults increase over time. Clearly,
trade sanctions will be quite damaging. Pakistan has already been subjected
to and have received threats of withdrawal of GSP facilities from the US and
the EU on the issue of child labor. 21 Only recently, the US has withdrawn
the GSP facilities in three categories of goods: surgical instruments, sporting
goods, and carpets. As mentioned above, child labor is a complex problem and
the UNICEF and the ILO have admitted that it can only be phased out
gradually. What is needed is a positive approach to assisting and encouraging
Pakistan through constructive policy dialogue, technical assistance, and fi-
nancial support, not trade sanctions. 28 The issue should be viewed sympa-
thetically, especially since the alternative to using child labor is exacerbation
of poverty and hunger.
Trade and Environment
The recent international debate on trade and environment has concen-

trated on three main issues, namely (i) environmental standards and interna-
tional competitiveness, (ii) use of trade measures for environmental purposes,
and (iii) harmonization of environmental standards. On the first issue, con-
cern is sometimes expressed in developed countries that liberalization of the
trade and investment regime in developing countries is likely to cause envi-
ronmental damage. Furthermore, they also fear that trade and investment
may be lost to countries which have less stringent environmental standards
(i.e., developing countries), or that competitiveness considerations may dis-
courage the implementation of more stringent domestic environmental re-
quirements (UNCTAD 1996). The developed countries also fear losing
investment in the sense that multinational firms may relocate their indus-
tries to countries with lax environmental regulations. As a result, the devel-
oped countries (particularly the US and several EUr countries) have /,
demanded the inclusion of environmental standards in the WTO, requiring I
27. Reported in the The News (1996) and DAWN (1996), respectively.
28. Sanctions, or even the threat of them can also backfire. In 1992, Senator Tom Harkins in-
troduced a bill in the US Congress barring imports made by children. The measure induced panic
among Bangladeshi garment makers. Faced with the potential loss of American markets, factories
laid off tens of thousands of young workers. Some of the children, UNICEF found, ended up as prosti-
tutes or welders (see Fairclough 1996 for an excellent survey on child labor).
that these standards be raised in developing countries, or else they should be

allowed to countervail the "implied subsidy" represented by these lower stan-
dards (Bhagwati 1995).
The impact of environmental standards on market access and competi-
tiveness is of particular concern to developing countries. They fear that their
exports may be denied market access or that high adjustment costs may be
incurred in complying with environmental standards set by developed coun-
tries. As to the concern of developed countries over losing investment to coun-
tries with lower environmental standards, there is little evidence of industrial

relocation because of different environmental regulations. The decision to re-
locate industries crucially depend upon labor costs, access to markets, and
existence of a developed industrial base. Environmental regulations and cor-
porate tax rates emerge as less important. 29 The second issue is concerned
with the circumstances under which the use of trade measures for the en-
forcement of environmental policy objectives is justified. Developing countries
are concerned because trade policy measures are not the first-best instru-
ments for achieving environmental objectives. Trade sanctions or the threat
of trade sanctions do not directly affect the root cause of the environmental
problem. ° Furthermore, some environmental groups in collaboration with
3
producer interest groups are finding it mutually advantageous to use envi-

ronmental arguments in support of their claims for unilateral import restric-
tions. Hence, the environment can provide a convenient excuse for raising
trade barriers. Finally, in addition to proposing the use of trade restrictions,
some environmentalists also oppose the liberalization of trade and invest-
ment on the ground that freer trade would increase income, which may result
in increase in environmental degradation. The third issue deals with har-
monization of environmental standards. The concern of some governments on
whether differences in environmental standards among countries, especially
between developed and developing countries, results in unfair trade advan-
tages and therefore calls for a degree of harmonization. Consensus has
emerged that the case for the use of trade measures to offset differences in
costs arising from differences in environmental standards is weak, both from
an economic and an environmental point of view (UNCTAD 1996). The Ad-
Hoc Working Group on Trade, Environment and Development firmly rejected
demands that were sometimes made to introduce so-called "green" counter-
vailing duties or other protectionist or WTO-inconsistent trade measures to
29. See Wheeler and Mody (1992), Grossman and Krueger (1992), Dean (1992), and Anderson
(1995) for further discussion and empirical evidence on this issue.
30. Beghin and Ronald-Holst (1994) have argued that if the production of a good induces pollu-
tion, the ranking of policy options should be to first, tax the effluent emission directly; next, tax the
polluting input; third, use output tax; and last, use a trade tax.
Pakistan 109
compensate for negative competitiveness effects, whether real or perceived, of

environmental policies. A certain degree of harmonization of policies and ap-
proaches may nevertheless be possible; For example, the adoption of reason-
able environmental standards and the wider adoption of the approach that
the polluter should, in principle, bear the cost of pollution, would help to
avoid trade frictions over ''hidden" environmental subsidies and "eco-

dumping" (UNCTAD 1994). Pakistan is fully aware of its commitment to im-
prove environmental. standards and as such has taken various measures in
recent years. The Pakistan Environment Protection Act 1996 is in its final
stages of development and will soon be presented to Parliament for approval.
The 1996 Act incorporates environmental impact assessm~nt, which has been
recommended by the UN Conference on Environment and Development. As
most of the principles stated in the 1996 Act are already practiced elsewhere
in the world, Pakistan has now joined the rank of those countries which give
top priority to environmental issues.
Improving the standards of living, labor and environmental standards,
and eradication of child labor comprise a right cause for mankind, a cause to
fight for, through the positive involvement of .the international community.
Hence, this issue is not one of trade and these standards, but these standards
and economic development, an issue of human dignity and human rights.
Each country should participate in the process, depending on its level of eco-
nomic development. This does not mean that developing countries should tol-
erate the blatant violation of fundamental human rights, but that the WTO is
not a suitable forum for dealing with such noneconomic issues.
Conclusions
This paper examined the implications of the UR Agreement on Paki-

stan's economy, identify the opportunities opened up by the Agreement and
costs imposed by, it, and the strategy that Pakistan can adopt to maximize
gains or minimize the damage from the changes contemplated in the Agree-
ment. The paper also examined the issue of growing regionalism, its impact
on Pakistan, and policy options available to meet the challenges of regional-
ism. The new issues that have emerged after the signing of the Agreement
include, among others, the interface between labor and environmental stan-
dards, and international trade. Developing countries, including Pakistan, are
likely to be adversely affected by the emergence of other new issues. This pa-
per also discussed the issue of linking labor and environmental standards
with trade and Pakistan's response to the challenge.
The Agreement has opened up opportunities for Pakistan. Its major ex-
ports would receive significant tariff reduction in their destination and the
proportion of exports affected by the existing NTBs should fall from about 60
percent in 1992 to 8 percent by 2004. A significant expansion in market
access in three major importing countries/region-the EU, US, and Can-
ada-in the areas of textile and clothing are expected due to the increase in
export quotas over a 10-year period. However, market access will only mate-
rialize if all the manufacturers start observing standardization and quality
controls. The UR Agreement on agriculture provide Pakistan greater market

access to its exports which would also fetch higher prices over the longer term
with freer trade. However, Pakistan is likely to face increased competition
from other agricultural commodity-exporting developing countries.
The GATS provides Pakistan an opportunity to increase the economic ef-
ficiency of its services sector, greater access to lower cost/higher quality serv-
ice inputs, and increased market access for its own competitive service
exports. As far as TRIMs are concerned, their implementation is expected to
attract foreign direct investment. However, Pakistan maintains a link be-
tween certain tariff exemptions and local content requirements in a number
of sectors, which have to be eliminated in five years' time. With the Agree-
ment on TRIPs, it is expected that the prices of patented pharmaceutical
products (medicine) will rise between 25 to 67 percent in Pakistan, with the
associated welfare loss ranging from US$46 million to US$186 million. Since
the TRIPs agreement relies heavily on the Paris and Berne Conventions in
the relevant areas to which Pakistan is not a signatory, Pakistan will there-
fore have to make significant changes to its legislation on intellectual pro-
perty rights. The trade liberalization program is likely to expose a number of
domestic producers to external competition. It is expected that this may bring
an increased number of applications for antidumping or countervailing ac-
tions.
The regional blocs such as the EU, NAFTA, and APEC are likely to have
a far-reaching impact on developing countries, including Pakistan, which are
not members of any of these trading blocs. Pakistan's policy response.should
be to strengthen regional associations, namely the SAARC and the ECO, and
to get membership in the ASEAN to enhance its bargaining power viz. the
two large trading blocs.
The interface between labor and environmental standards and inter-
national trade has taken center stage in the international debate. Developed
countries led by the US and supported by many European countries have
been pressing hard to include the issue of labor and environmental standards
in the WTO's future work agenda. Developing countries thus far have re-
sisted such initiatives on the ground that, if nontrade issues are dealt with in
Pakistan 111
multilateral trade agreements, this would inevitably restrict rather than

promote trade. Improving labor and environmental standards and eradica-
ting child labor are likewise causes that the international community must
uphold. This does not, however, mean that developing countries should
tolerate the blatant violation of fundamental human rights. Pakistan believes
that the WTO is not a suitable forum for dealing with such noneconomic is-
sues.
Pakistan has taken various measures its improve its labor and environ-
mental standards. It has introduced National Environmental Quality Stan-

dard (NEQs) with effect from 1 July 1996, and the Pakistan Environmental
Protection Act 1993 has been revised to incorporate the recent challenges. It
has already ratified five out of seven ILO Conventions that form the "Core"
labor standards; the other two are under consideration with a view to ratify-
ing them. Pakistan has also ratified the UN Convention on the Rights of the
Child. However, mere ratification of various ILO Conventions is not enough.
What is needed is strict compliance with these Conventions in real life, which
is lacking at the moment.
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Emerging Global Trading Environment:

Challenges for Pakistan

grasped adroitly, can benefit both developed and developing countries.

into concrete trading opportunities. Some of the agreements leave a margin of

Trade and Foreign Investment Policies

Trade and Foreign Investment Policies

Since 1988, Pakistan has followed a, more market-oriented reform stra-

Table 1: Tariff Reduction Schedule

Maximum Tariff Rate

agricultural imports. In 1994, the average tariff rates on agricultural goods

Restricted List2, products which were importable only through designated

millwork. However, Pakistan still applies a substantial number of nontariff

To complement the liberalization of the trade regime, the exchange

Foreign Investment Policies

Pakistan has implemented a more liberal foreign investment policy as

approval, with restrictions on equity participation and capital and dividend

takeover of foreign investments by the government. Foreign investors may, at

Pakistan Trade Performance, 1980-1996

Pakistan's exports fluctuated widely during 1980-1996, increasing as

Table 2: Basic Information about Pakistan's External Trade

Sources: Ministry ofCo=erce (1995, 1997a).

attributable to world recession and to shortfalls in the output of major export

Table 3: Share of Pakistan's External Trade in World Market

Source: Ministry of Commerce (1997b).

Pakistan's exports are highly concentrated on a few items. As shown in

Table 4: Pakistan's Major Exports

Leather and leather

Fish and fish

Pakistan's imports are also concentrated on a few items. As shown in

Table 5: Pakistan's Major Imports

Petroleum and products · 22.8 24.2

Direction of Exports and Imports

Although Pakistan is trading with a large number of countries, its

Table 6: Shares of Pakistan's Major Exports to the EU, Japan,

EU 3.1 3.6 19.0 17.6 25.2 36.5 60.2 42.0

EU 2.4 4.1 16.3 51.7 25.2 35.5 65.9 43.5

EU 2.5 3.9 17.1 58.7 31.5 43.5 67.6 46.7

EU 1.9 4.4 19.5 40.0 31.6 44.5 56.0 45.5

EU 6.3 5.0 18.5 49.1 29.5 45.8 57.5 45.5

EU 6.3 2.5 15.3 52.6 25.4 47.6 67.3 50.4

EU 3.1 0.6 43.0 57.1 35.2 34.6 52.2 41.6

(continued next page)

Leather Fish and Artsilk and

EU 4.7 1.7 45.5 34.0 35.2 33.0 49.9 41.6

EU 5.9 2.5 46.5 52.6 45.8 27.0 47.1 36.3

EU 2.1 2.1 46.7 56.7 46.6 18.4 47.5 37.5

EU 2.8 2.7 42.9 60.6 44.4 24.0 47.5

EU 2.2 1.2 51.8 67.4 43.6 26.7 49.7

Commodity and regional imports of seven major commodities accounting

Table 7: Shares of Pakistan's Major Imports from the EU, Japan,

EU 8.1 0.3 31.1 25.1 2.5 39.9

EU 13.9 0.7 47.9 39.1 1.1 4.3 52.8

EU 19.6 0.9 40.3 32.2 0.5 4.9 46.0

EU 14.9 12.2 36.7 34.1 2.5 12.3 43.2

(continued next page)

EU 31.0 7.2 36.7 37.0 4.7 4.8 47.1

North America 8.1 3.0 8.6 9.4 5.9 49.2 11.4

EU 8.3 8.0 39.6 33.9 1.3 11.2 37.4

Note: ... means data not available

The Uruguay Round Agreement and Its Implications

Economic Implications of the Agreement

Whereas the UR Agreement has assured Pakistan greater access to markets

The achievements of the Agreement in the area of tariff reductions and